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Will the Nakheel deal really revive Dubai real estate?

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It is perhaps a little premature to reflect on what the proposed deal for the $23.5 billion Nakheel debt means for the Dubai real estate sector. The $9.5 billion cancelling of debt by Dubai Government goes a long way towards a solution but the devil is always in the detail and the banks have not signed yet.

However, two things have become much clearer. First, Nakheel is to continue as an independent and completely recapitalized company, if the deal goes ahead. Secondly, there is an intention to continue with Nakheel development projects, albeit almost certainly more slowly than previously planned.

Thus for existing Nakheel property owners, and there are already many thousands, a blight is lifted from their real estate. The future of the development company that is still responsible for community maintenance is now assured, although Nakheel community charges are still notoriously high compared to other developers.

Off-plan rescue

For those caught up in the numerous off-plan projects that Nakheel abruptly halted 18 months ago, actually a long time before the rescheduling declaration last November, there is new hope for solutions. These will clearly take time to put together on a case-by-case basis but an end to this nightmare is in sight.

However, the idea that Dubai will instantly revert to the boom times of 2007-8 should be immediately dismissed, and that is no bad thing either. That is just not going to happen. There is simply too much upcoming inventory, and bailing out Nakheel only adds to the supply chain.

For contractors who now get paid this is clearly a relief from a desperate situation, but it is not going to be back to business as it used to be. Indeed, the contractors themselves will be a bit wary of Nakheel after its recent problems.

Bank leverage

It is to be hoped that the banks are insistent on seeing a clear business plan and management reorganization as a part of their agreement to the new loan deal. That will mean that professional management is in place and that business is done on a solid and sustainable basis and not another boom-to-bust cycle.

For part two of the renaissance of Nakheel has to be the emergence of a very different company with a focus on customer service and project delivery and not endless off-plan mega projects of what we have now seen to be very questionable economic value. Then confidence will return to Nakheel.

Does saving Nakheel go a long way to solving the problems of Dubai real estate? Not really because the main problem is oversupply, and saving Nakheel adds to that upcoming supply. But in so far as this marks a major step forward in sorting out the Dubai debt mountain it is the beginning of the end to Dubai’s real estate crash.

The local stock market jumped 4.3 per cent on the news of the debt proposal. But that was less than half of the fall when the debt standstill was announced. This is about right. A lot is still to be done to sort out the Dubai real estate sector.

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Written by Peter Cooper

March 27, 2010 at 10:47 am

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